Abstract
This study was to examine and find out the role of auditing on management’s control success with a particular reference to the Department of Audit, Ministry of Finance, Uyo, Akwa Ibom State. To achieve this objective, four research questions and three research hypotheses were formulated to guide the researcher study. The data collected were analyzed using simple percentages and tables to analyze research questions, and Chi-square statistical tool was used for testing the research hypotheses. A structured questionnaire was used as the major instrument for data collection from the staff and management of Department of Audit, Ministry of Finance, Uyo. After careful analysis of the data, the following findings were revealed that; auditing enhances accountability in public sector in Nigeria. The study was concluded with some recommendations that the state government should improve the remuneration and fringe benefits of internal auditors as this would enhance their efficiency and honesty in the discharge of their duties. Undoubtedly, upholding integrity, objectivity and transparency in the conduct of their respective audit functions will make the internal auditors to be more relevant in the public sector and the rate of inadequate qualified manpower in the audit departments in the public sector should be minimized.
CHAPTER ONE
INTRODUCTION
- Background of the study
Organization all round the world be it public or private or otherwise needs auditing for proper assessment of their financial statements. Auditing is an independent examination of an expression of opinion on the financial statement of an enterprise or organization by an appointed auditor in pursuance of that appointment and in compliance with any relevant statutory obligation (Chamber, 2008). It aims at providing solution to the inevitable problem of credibility in report and accounts. It prevents and detects errors and frauds and also produces a report of the true and fairness of the financial statement (Coper, 2003). They also obtain full understanding of the operations under review. The role of internal audit has grown tremendously in most organizations in the recent past. This can be attributed partly to the growth of the organizations, which entails widely extended operations and the need to ensure that the organizations policies and basic accounting controls are observed at every facet of the organization. Again, it can be observed as a measure by management to ensure that the government regulations concerning the operations of organizations, both public and private are duly complied with so as to guard against conflicts and inconsistence with the law.
As the organization expands and supervisory responsibility broadens, the head can no longer have personal knowledge of every aspect of the organization. It becomes impossible for him to control or monitor the continuing effectiveness of all controls. This calls for the delegation of this responsibility to a separate department called the internal audit department. Internal Audit Department is a department set up by management, usually manned by a Chartered Accountant, as established in section 358 of the companies Act 1976, to receive the activities of other employees thereby enhancing controls in the organization. Management’s Control Success
Decisions may be made for various purpose and they vary from one business to another. Internal control provides assurance and dependability of the financial statements used in making decision, hence, there is need for auditing of financial statement, Auditing therefore is made to determine whether persons in positions of fiscal responsibility in government and commerce are acting and reporting in an honest manner.
The ministry of finance plays a vital role in the overall planning, controlling and disbursement of government funds, for the day to day running of the state administration. Basically, these functions are carried out by various departments in the ministry, the departments; personnel, finance and supplies, planning, research and statistics, office of the Accountant general. Internal Auditing
The personnel department is headed by a director and its functions include appointment, promotion and discipline of staff and other staff welfare matters. The department of finance and supplies is headed by director, whose functions include provision of finance management information to the ministry of decision making.
Planning, research and statistics department is headed by a deputy director research into various aspects of government finances and economy while executive director is in charge of ministry of finance incorporated.
The office of the Accountant general is headed by Accountant general whose functions include provision of efficient Accounting services to the government and advising on financial matters. At the helm of affairs in the ministry is the Chief Executive called Honourable Commissioner for Finance while the Chief Accounting Officer is the Permanent Secretary. Management’s Control Success. In general, this ministry takes charge to disbursement of funds to ministries, departments, boards and parastatals for payment of staff salaries and wages, pensions and statistics. The main focus of this research state the intention of the researcher to study the impact audit could create on public sector accounting system in Akwa Ibom State.
It is argued that if shareholders have perfect information about managers‟ actions, there would be no information asymmetry between the two parties. Information asymmetry exists when perfect information is absent, which is the assumption of agency theory and since information asymmetry exists, stockholders have difficulty detecting earnings management (Fama, 1980). Though, it is argued that businesses adopt some level of discretion in their decision because no firm adopts a hundred percent rule based accounting systems when reporting their economic performances and financial position. In fact, Bello (2002) is of the opinion that it is unimaginable to have accounting systems that are totally rule based without room for occasional judgments.
A considerable number of studies that include Okolie (2014), Okolie, Izedonmi and Enofe (2013), Zgarni, Hlioui and Zehri (2012),Chi; Mehmet and Emin (2012),Ahmadzade, Hassanzadeh, Pooryegane and Ebrahimi (2012), Lisic and Pevzner(2011), Francis and Yu (2009), Rusmin (2010),Roger, Frank, Erik and Ann (2003), Zhou and Elder (2003), and Gaver and Paterson(2001)have found that quality of audit is one of the constraining factors that limit managements‟ manipulation of accounting numbers. Watts and Zimmerman (1986) show that auditing is a valuable form of monitoring used by firms to reduce agency costs. The value of auditing arises, because auditing reduces the misreporting of financial information. The value of auditing on constraining managerial discretion, however, is expected to vary with the quality of the auditor. Becker, DeFond Jiambalvo and Subramanyam(1998) and Heninger (2001) report evidence consistent with the external auditor acting as a constraint on earnings management, with the effectiveness of the constraint depending on audit quality.
The demand for auditing arises from the auditor‟s monitoring role in theprincipal-agent relationship (Eilifsen & Messier, 2000). The performance quality of this monitoring function may vary. Audit quality describes how well an audit detects and reports material misstatements of financial statements, reduces the effect of information asymmetry between management and shareholder sand therefore helps protect the interests of stockholders. High audit quality should be associated with high information quality of financial statements because financial statements audited by high quality auditors may be less likely to contain material misstatements. From an agency theory perspective, audit is a monitoring mechanism that provides reasonable assurance that financial statements are free of material misstatements and therefore protects the interests of shareholders. When the interests of management conflict with the interests of shareholders, management may not act in the best interests of shareholders. A high level of audit quality is therefore expected to result in lower levels of earnings management.
Literature has documented a number of attributes that explain audit quality and how the combined effect of the attributes could help checkmate managers‟ excessive earnings management practice. Of the numerous attributes identified in the literature, size of audit firm, independence and specialization of auditors seemed to stand out. Size of an audit firm is considered critical to its ability to assemble well qualified and highly experienced auditors to engage in different aspects of audit functions. Such a firm is more likely to engage in a wide range of audit assignments for different companies in view of its economies scope and scale. In line with these postulations, Francis, Maydew and Spales (1999) have documented evidence showing that the Big-4 audit firms provide a more significant constrain on earnings management than other audit firms. Thus, the size of an audit firm affects the extent to which it constraints earnings management practice.
In theory, a company‟s auditors are appointed independently by its shareholders, to whom they report. In practice however, auditors are chosen by the company‟s bosses, to whom they all too often become beholden (The Economist, 2002). Hence, auditors might be more inclined to allow aggressive and opportunistic reporting of accruals, resulting in lower quality audits and thus increase in earnings management. This places a question mark on the independence of an auditor.In addition to auditor size and auditor independence, auditors‟ industry specialization is considered to be an important attribute of auditquality as it impacts the earnings management of firms. Studieshaveshown that client firms with industry specialists are associated with higherquality of financial reporting (Balsam, Krishnan and Yand,2003; Krishnan, 2003).Like large auditors such as the Big 4 invest in brand name capital, industry specialists to make investments in industry specific accounting technology to differentiate themselves from other auditors (Craswell, Franci& Taylor1995)
The high-profile corporate scandals of 2008 through to 2009 in Nigeria has continued to raise a lot of concern about the integrity of financial and auditing reporting systems in the country. Some corporate organizations in the banking and manufacturing sub-sectors that were never suspected to have problem were found to be living in past glory due to excessive earnings management practices. The ugly practices which were later discovered to have been on for sometime went undetected or unreported by auditors. The experience hassince left its perils in the mind of shareholders, prospective investors,regulators and financial analysts.
The chemical and paints industry in Nigeria is considered one of the most susceptible sub-sectors of the country to earnings management. This is due to the ongoing effort by both government and industrialists to develop the industry as priority area of industrial investment and a support toward government housing policy for Nigerians. The sub-sector has undergone various levels of transformation from themanual based processes to more technologically advanced production methods. In view of the renewed interest in the industry owing to its recent impressive performance and high level of activities, it is imperative to examine its earnings management practices and how it is affected by audit quality.
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